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Providers and the Onus of Compliance

Providers and the Onus of Compliance

After years of reading compliance-related articles, attending industry trade show panel discussions, and reviewing regulatory directives, you no doubt understand that a comprehensive regulatory compliance strategy should be a central focus in every product provider and administrator’s business. However, many organizations are still troubled with determining whether their compliance obligations extend to the actions of agents and dealers.

Simply put, do providers and administrators have an obligation to ensure their products are offered in a compliant manner, by third-party agents and dealers? The answer is yes.

This article will focus on some background and current trends regarding this obligation, as well as outline some basic compliance best practices to limit exposure.

Increased Awareness of Add-on and Ancillary Products

The issuance of regulatory guidance by federal administrative agencies in combination with numerous federal and state enforcement actions by, among others, the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), and state attorneys general against industry participants — both dealers and product providers — illustrates the emphasis being placed on compliant product sales. From a federal perspective, the CFPB and FTC have been scrutinizing product providers through both exams and enforcement actions.

In 2014, the CFPB issued a consent order to an automotive lender and product retailer stating that the retailer “made deceptive statements regarding the cost of add-on products and the scope of coverage of vehicle service contracts.” More recently, in 2016, the CFPB issued a consent order against a buy-here, pay-here dealer for failing to disclose the sale of packed add-on products as finance charges. The consent orders resulted in large fines and consumer restitution totaling in the millions.

The FTC’s Operation Ruse Control initiative was structured as a broad-scale crackdown on deception and fraud within the auto marketplace. As part of its expanded authority under the Dodd-Frank Act, the FTC has brought numerous actions against dealers and product providers alleging fraudulent and deceptive practices.

In March of 2015, the FTC brought an enforcement action against a dealer and a product provider for failing to disclose that the fees charged for a biweekly financing add-on product negated all, or substantially all, of the program benefits. Similarly, in September of 2016, the FTC issued a consent order against a California dealership and several of its owners, individually, alleging deceptive and unfair sales and financing practices. The FTC alleged, among other things, that the dealership charged consumers for add-on products without their consent or falsely claimed that the products were required or free. These consent orders resulted in fines, waiver of future payments, and consumer restitution totaling in the millions.

In the same way, state attorneys general have continued to increase enforcement related to add-on products. In connection with a recent enforcement action, the New York attorney general has shown its intent by stating that it “will continue to investigate and hold accountable any auto dealers trying to pad their pockets by charging fees for undisclosed products and services that consumers do not need and did not ask for.”

Outside of increased regulatory scrutiny, providers, and administrators need to be aware that plaintiffs’ lawyers may look to include any related parties, including dealers, agents, and providers, within a civil action. Any party who receives compensation related to the sale of a product or service can reasonably expect to be a named defendant in any associated action.

Development of Products and Consideration of Value

Providers and administrators should include their legal and compliance departments in the product development process. The terms and conditions should be drafted to ensure accuracy in coverage, limitations, and exclusions. In addition, all marketing and promotional materials should be scrutinized to ensure they reflect the actual terms and conditions of the products offered. The materials should not include generalized summaries that could be construed as misleading or deceptive to a customer.

Product development and underwriting should include a calculable and reasonable maximum benefit to the purchaser. Providers should consider a reasonable retail seller markup or commission when designing the product benefits to ensure the purchaser receives substantive value through its purchase. All products should contain eligibility and pricing guidelines that are fair, transparent, and prohibitive of discriminatory or disparate pricing.

Sales Process and Guidelines

Providers and administrators should develop sales guidelines or a code of conduct related to the sale of its products by retail sellers. These guidelines should reflect the organizations’ commitment to transparency, accuracy, and the consistent and fair treatment of all customers. All guidelines should encourage disclosure and prohibit sales via high-pressure or coercive sales tactics. Further, all retail sellers should adopt processes to document compliance with applicable laws and the established guidelines.

Providers and administrators should offer compliance, ethics and sales training to agents and dealers. These training materials and scripts should be analyzed for consistency and transparency in relationship to the underlying product being offered; ensure that any sales scripts are consistent with product benefits and can be reasonably understood by the average consumer. Curriculum should be reviewed by the provider or administrator’s compliance and legal team, in the event compliance, ethics, and sales training related to your products is offered by an agent.

Agreements with Agents and Sellers

The provider’s agreement with the agent and dealer should reference your code of conduct and prohibit any sales practices in contradiction with these requirements. In the event a provider or administrator becomes aware of a violation of these sales guidelines or any applicable law, notice should be sent to the dealer or agent requiring it to cease any unauthorized activity and to cure any defects with respect to future sales.

It is imperative that providers and administrators document this notice and any associated resolution. If the dealer or agent fails to remedy its violations, its sales authority to offer your products should be terminated.

Both regulators and plaintiffs’ lawyers have increased enforcement actions and litigation related to the sale of add-on products. Product providers, dealers, and their principals have been fined and forced to pay restitution to consumers. While every organization is different, providers and administrators would be wise to include their legal and compliance professionals in the product design, sales guidelines, and on-boarding of new clients; it may be the deciding factor in defending a potential lawsuit or regulatory enforcement action.

 

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Regulatory Best Practices for F&I Product Providers

Regulatory Best Practices for F&I Product Providers

Since its formation in 2011, the Consumer Financial Protection Bureau (CFPB) has not been a traditional regulator. There have been countless articles and debates, as well as legal proceedings, over the scope of its regulatory powers. The underlying issue over who should be accountable as part of a consumer financial product or service — whether as a finance company or its service provider — remains undefined.

There does, however, seem to be a common consensus amongst industry participants: Whether you’re a dealer, finance company executive or service contract or ancillary product provider, the CFPB will, in some way, have an impact on your business. Implementing best standards and practices could prove to be a proactive approach to answering an almost inevitable inquiry, regardless of its origination.

In June of 2015, the CFPB developed its “Automobile Finance Examination Procedures.” This document reaffirms the commitment of the CFPB to include add-on products within their purview of analysis and regulation. Most notably, the examination procedures outline a process to be used in the examination of auto lenders, lessors and servicers.

This article will focus primarily on the specific criteria related to add-on products and services, as well as summarize some basic best practices to prevent potential violations of the CFPB standards.

Covered Products and Applicable Statutes

“Automobile Finance Examination Procedures” expressly defines three product types: guaranteed asset protection (GAP), extended warranty (more accurately known as vehicle service contracts or VSCs) and vehicle add-ons such as anti-theft and paint-protection products. It further distinguishes these products by an association to either the vehicle purchase or the financing relationship.

It is worth noting that, despite a potential insurance exemption, the CFPB’s document defines GAP as an insurance policy providing coverage for a financing obligation that is the difference between the asset value and the amount covered by another insurance policy.

In addition, the document outlines an examination process used to determine compliance or violations of numerous applicable credit statutes and a broader review of potentially unfair, deceptive or abusive acts or practices (UDAAP) with respect to interactions with consumers. A review of this language in its broadest form appears to support the belief that the CFPB’s intent is to exercise its jurisdiction and take action over any act it believes violates UDAAP regardless of its specific application under a statute or regulation.

“Automobile Finance Examination Procedures” further addresses add-on products and provides for the following examination procedures related to the optional products. These include the following:

  • Determine whether the servicer offers or finances optional products, services or debt-cancelation products.
  • Determine how the servicer monitors optional products attached to loans or leases, including canceling the products in a timely manner, where applicable.
  • Determine whether the servicer uses a service provider in connection with optional products and, if so, how the servicer monitors the administration and offering by a service provider. This would include disclosures associated with the optional nature of the product.
  • Review the marketing materials to determine whether each optional product’s costs and terms are clearly and prominently disclosed.
  • Determine whether the servicer added on optional products or services without obtaining explicit authorization from the consumer.

Industry-related organizations should accept the premise that the CFPB intends to review and regulate practices associated with the sale and servicing of ancillary services and add-on products, whether through the indirect regulation of a finance company or through the designation as a service provider. So what can a product provider or administrator do to proactively prepare itself for inquiries related to the sale and financing of its products?

One possible solution is to implement a compliance program that includes a set of best practices and standards. This guidance should be utilized as a foundation for the creation, design and analysis of all product offerings, their associated marketing materials and process guides.

Transparency in Media

While every organization is unique and will need to design a customized best practice guide geared towards its specific business and product offerings, it is useful to discuss some areas of general focus when developing a set of best practices and standards.

First and foremost, providers and administrators should develop consumer documents using clear, transparent, everyday language which can be easily understood by a consumer. Specifically, the terms and conditions of products should accurately describe the coverage, limitations and exclusions.

In the event the product is cancelable, the terms and conditions should clearly say so and provide specific instructions on how to cancel the product. In addition, the terms and conditions should clearly state how refund amounts are calculated, along with disclosing any deductions. Most importantly, the terms and conditions should conspicuously state that the product is optional in nature, list the price of the product and include a statement notifying the consumer that the actual cost of the product will vary if the product is financed.

Further, all associated marketing materials should reflect the actual terms and conditions of the products offered. This includes striving to ensure that the materials offered are not deceptive or misleading with a focus on as much detail as feasible within the materials. The materials should not provide overly general summaries that could be misleading to a consumer.

The existence and nature of exclusions and limitations should be included and should clearly identify who is obligated to perform in relation to the product being offered. This should include, at a minimum, the name and address of the seller, administrator and provider.

All products should be developed to provide reasonable maximum benefits to consumers. Providers should consider the amount of foreseeable seller commissions when designing limits of liability and maximum available benefits within a product. Products should be designed to ensure the consumer has the ability to receive substantive value through its purchase.

Finally, the eligibility and pricing guidelines for a product should be established in a transparent, fair and nondiscriminatory manner.

Process and Administration Guidelines

Every product designed should include instructions for the administration and sales of the product. These should include information for both sales representatives and administrative staff.

These guidelines should include a process for the administrator to appropriately address situations where a consumer is sold a product for which he or she is not eligible or stands to receive no potential benefit. At a minimum, this process should include notifying the consumer and immediately refunding any charges assessed related to the product or service. In order to prevent discriminatory handling by the administrator, the guidelines should include both instruction and mechanisms to be used by claims and cancelation personnel to ensure all consumer requests are handled the same.

Each product should include a sales guide for its sales representatives. This guide should clearly define the scope of what is permitted when offering the product to consumers. Further, the guidance should include a strict policy that prohibits sellers from responding to a consumer question for which the seller does not know the answer or which is not addressed within an approved guideline.

All consumers should be afforded an opportunity to review the full terms and conditions of any product at the time of or prior to its purchase. Last, no seller should establish a false sense of urgency or utilize other high-pressure sales tactics in conjunction with the sale of a product.

While uncertainty still remains as to the extent or nature of regulatory oversight by the CFPB over add-on products and services, it is apparent, through its inclusion within the “Automobile Finance Examination Procedures,” that it intends to review the value, transparency and sales practices associated with their offering to consumers. This article outlines some basic standards that can be used by providers and administrators in developing products. Ensuring compliance with a basic set of standards, in addition to a comprehensive compliance program, should enable your organization to proactively prepare for inquiries regarding its products, whether from a dealership, finance company, business partner or regulator.

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